Vanguard Fund Gets Morningstar Downgrade as Its Manager Takes a Step Up

With the Sept. 1 news that Vanguard Health Care Portfolio Manager Jean Hynes will become CEO of Vanguard subadvisor Wellington Management next year, Morningstar decided to reevaluate the $55.7 billion fund.

Hynes, who took charge of the fund in 2013, will continue to serve as its sole manager after she becomes CEO on July 1, 2021. She became a co-manager of the fund, which trades as VGHCX, in 2008.

"Vanguard Health Care's personnel advantage won't be as pronounced after its manager takes on a second role in mid-2021, so its People rating has been lowered to Above Average from High, and the Morningstar Analyst Ratings of both its share classes have been downgraded to Silver from Gold as a result," wrote William Samuel Rocco, a senior manager and research analyst, on Wednesday.

Despite this move, Rocco says, Morningstar believes the fund "will continue to have a personnel edge over most of its rivals after Hynes becomes CEO."

The said, though, "serving as the CEO of Wellington comes with significant responsibilities, as does running a large healthcare fund like this one, so this fund's personnel advantage won't be quite as strong," he explained.

Hynes and the Wellington healthcare team should keep looking for "innovative firms with differentiated products or services and attractive valuations relative to their growth prospects, and she and the team will continue to allow stock selection to drive industry exposures and pay ample attention to foreign stocks," Rocco said.

"This process has earned good results during Hynes' seven-year tenure at the helm, and this fund is still an attractive option for investors who are seeking a geographically diverse healthcare offering and understand the risks that come with its sizable foreign stake," according to the Morningstar analyst.

Fund Performance

This fund has posted "fairly strong relative returns" in the past year, Rocco says, noting that its investor share class gained 25.8% for the 12 months through Sept. 30.

"That return was much better than the 21.6% gain of the MSCI ACWI Health Index and the 20.1% gain of the S&P 1500 Health Care Index, but it was significantly worse than the 31.9% return of the average member of the health category," the analyst explained.

While this fund's outperformance versus the indexes was largely tied to its strong stock selection in the pharmaceutical industry, its underperformance versus its typical rival mainly resulted from its underweighting in the biotech industry, Rocco notes.

Vanguard's Response

In comments shared with ThinkAdvisor Friday, the fund giant said: "Wellington Management has advised Vanguard Health Care Fund since 1984, and Vanguard has strong conviction in the world-class expertise and portfolio management capabilities of Jean Hynes and the depth and breadth of the Health Care team that supports her at Wellington."

Vanguard adds that the fund's performance "is the most tangible reward for investing. It's what attracts investors and helps assure them that they're on the right track."

From May 31, 2008 — when Hynes became the fund's associate portfolio manager — through Sept. 30, 2020, the fund had an annualized total return of 12.6%, according to Vanguard, vs. its corresponding benchmark's performance of 10.6% and its peers' performance of 11.4%.

"Further, Vanguard rigorously and continuously reviews the portfolios, philosophy, processes, investment results, and the strength and composition of these firms' management teams," it explained.

"We believe there are fundamental and critical drivers to success in this business — firm, people, philosophy, and process. With that in mind, there is no better testament than the longevity and depth of our partnership with Wellington — and the long term outperformance of Wellington-managed Vanguard funds," the fund giant said.